telmo francisco vieira - iseg

Corporate Governance 1

Telmo Francisco Vieira

Integration of mergers and acquisitions

Corporate governance models and M&A


Index

Corporate Governance

1. Introduction

2. Legal and regulatory Guidelines concerning Corporate Governance in UK

3. Legal and regulatory Guidelines and Models concerning Corporate

Governance in Portugal

4. Legal and regulatory Guidelines and Models concerning Corporate

Governance in Germany

5. Examples of Corporate Governance models

6. Example of a Corporate Governance model for a Portuguese company

7. Comparative study: corporate governance codes in 10 European

countries

8. Potential areas for academic research

9. References


Index


Exercise - New model of corporate governance in a post-acquisition

operation

Disclaimer: As Corporate Governance deals with several codes and legislation/regulations and changes

may take place at any time, the following slides should be understood as a working basis. In presence of a

specific assignment it is necessary to validate if specific regulation is still in force or if it registered any

changes.


1. Introduction



Corporate Governance has been associated to the relation principal-agent problem.

The investor (principal) hires a manager (agent) to administer the

companies on their behalf.

Corporate Governance concerns how to align the interests of both parts and assure that

companies will be managed in the principal’s benefit.

Corporate Governance is frequently associated with the structure of management body

of companies.

1. Introduction


1. Introduction

The increasing concerns about organization’s sustainability, ethics and financial scandals

that occured, have conducted to a closer look to which could be the best governance

practice.

Corporate Governance – an increasing concern

These concerns have been reflected by:

➢ Governments, in the production of norms and regulations that seek to guide the

implementation by organizations of best governance principles.

➢ Organizations, by implementing the corporate governance models.

➢ Society in General with new instituts/associations that focus on corporate

governance.

In terms of political power there is now an awareness of the contribution that good

corporate governance makes to economic growth, investment and financial market

stability.


Corporate Governance’s objectives:

The main objectives to be achieved by corporate governance are:

➢ ensure integrity, professionalism and accountability of management;

➢ consider internal control mechanisms to encourage good management

practices;

➢ predict appropriate mechanisms of transparency and reporting;

➢ establish supervision mechanisms that may contribute to the credibility of the

global business environment.

1. Introduction


As Economy walked into a recession at 2000, stock prices fallen.

The decreasing of stock prices was even deeper by the awareness of practices/behaviours

non-ethics by some companies.

Some examples of fraud:

❖ Decline in the Economy - some history event


❖ Examples of commited fraud

Enron 1. Used special-purpose entities (SPE) to decrease their responsibilities and

to count artificial income for either SPE either Enron.

2. Contracts lasting for several years were accounted for in the first year,

reducing costs and oversizing income.

1. Current expenditures were accounted as investments (with this they

transformed the losses they indeed had in profits).

2. Very large amount of loans to top executives were not paid by them.

WorldCom

Tyco 1. Manipuled the accounts to show high profits.

2. Non-approved loans to top executives (these executives used

company’s money to buy personal property and other assets).


Other fraud examples were studied by Agrawal, Jaffe, and Karpoff (1999).

They identified 103 companies accused of fraud present at Wall Street Journal Index

between 1981 and 1992. They have also established 103 control companies whose code of

economic activity and net sales were similar to that of companies with fraud.

➢ The companies that were part of fraud’s companies sample had

significatively more fraud than the ones of the control group in the 2 years

before and 2 years after regarding the year of the key event for the study.

➢ The differences in operating performance around the event of fraud were

not statistically different between two groups.

Regarding management rotation they “didn’t find evidence that fraud

revelation leads to a subsequent alteration in the leadership structure” –

in the cases which CEO and Chairman are the same person.

They also evaluated the rotation for the tree top positions and the alterations

remain non-significant between companies in fraud situation and the ones in

the control group..

❖ Studies regarding fraud


During the year of the fraud event, and in the 3 following years, the companies in fraud

situation reduce slightly their executive board, reducing simultaneously their internal and

external members; on the other hand, the companies in the control group increased slightly

their executive board (but not significatively).

➢ The authors conclude that the reduced impact from reported

frauds in the study may reflect the favorable economic and

finantial characteristics for the period 1981-1992.

❖ Studies regarding fraud (cont.)


❖ Some books about corporate fraud

Howard Schilit published in 1993 the first edition of

his book: “Financial Shenanigans in 1993”.

Created an analysis and research center (CFRA) to

detect early warning signs in relation to operational

problems or accounting “anomalies”. In the 2002

edition of his book he mentions 30 techniques of

financial “cheating” defined as practices that

intentionally distort the financial situation or

performance reported by a company.

In 2002, a similar book with many other examples

was published by Mulford and Comiskey.

These disclosures have caused outrage and resulted in Sarbanes-Oxley Act

(SOA) in July 30th, 2002.

2018 editionISBN-13: 978-1260117264

ISBN-10: 126011726Xpj v


❖ Some books about corporate fraud

2018 editionISBN-13: 978-1260117264

ISBN-10: 126011726Xpj v


The Sarbanes-Oxley Act covers 11 main

areas:

1. PCAOB – Public Company Accounting

Oversight Board

PCAOB is a private nonprofit entity subjected to

the regulation and supervision of the SEC.

This organization is responsible for the

supervision of the audit listed companies and

the establishment of standards for audit reports.

All audit firms must be registered in the PCAOB.

All companies must report to its audit committee

is composed of at least one member who is

financial expert under the SEC definition.

❖ Sarbanes-Oxley Act

http://www.olhares.com/leituras/foto488833.html


2. Auditor independence:

➢ Audit firms are prohibited to providing non-

audit services such as consulting.

➢ The Audit Partner should rotate at least each 5

years.

➢ Audit reports should be directed to the audit

committee rather than to the management

body.

➢ The auditing firm should not have employed

an accounting or financial responsible of the

audited company during the period of one year

before the audit.

❖ Sarbanes-Oxley Act (cont.)

http://www.olhares.com/5_vs_4/foto481531.html


3. Certification: The CEO and CFO must be sure that

the report is according the SEC requirements and

properly presents the financial position of the company

(making false statements gives rise to a prison

sentence between 10 and 20 years);

4. Disclosures: Each annual and quarterly report

prepared in accordance with those norms SEC has to

disclose all material off-balance-sheet transactions.

5. Insider trading: Insider trading with the stocks of the

company in which they work is considered an event

subject to disclosure that must be reported in a Form 4

within a period of 2 days (previously was until the 10th

day of the month following the realization of the

transaction).

6. Conflict of interests: Personal loans are prohibited

by companies to administrators and directors;


http://www.olhares.com/xadrez/foto14595.html



7. Professional responsibility: New regulations

establish minimum standards of professional conduct

regarding lawyers who practice their activity in entities

supervised by SEC.

8. Studies and Reports: Must be conducted several

studies.

9. Fraud accountability: The elimination, alteration or

falsification of registrations is a crime.

10. Sanctions: All audit or work papers must be kept

for 5 years. False certifications or reports forgery must

result in fines until 5 million dollar and/or prison until

20 years.

11. Authority of SEC: Everyone who had violated the

antifraud norms may be prohibited of exercise

administrative or management positions.

http://www.olhares.com/envia_lhe_lembrancas_minhas/foto351134.html


On August 16, 2002, the New York Stock Exchange (NYSE), submitted to the SEC for final

approval a review of the requirements for admission to listing.

❖ NYSE

The new rules to admission the listing of shares

in NYSE go beyond the auditor’s independence

conditions required by Sarbanes-Oxley Act.

The company must have an audit commission

composed by at least 3 persons.

The commission must have a detailed

description, in writing, about their activities.

The next slide details the specifications for the

independence of the board:

http://melda.gallery.whitelands.com/photos/new/large2657


➢ Most members of the board should be independent;

➢ The non-executive directors should meet regularly without the presence of

executives;

➢ The boards must have independent compensation committees and

nomination committees;

➢ All shareholders should vote on stock options plans;

➢ All listed companies must adopt a set of guidelines for corporate governance.

Regarding the management guidelines, it should include their qualifications,

responsibilities and compensation and access management;

➢ All listed companies must disclose a code of conduct and ethics.

❖ NYSE

❖ specifications for the independence of the board


The Sarbanes-Oxley Act and the new requirements for listed stocks in NYSE focused the

deficiencies perceived regarding Corporate Governance.

➢ The board members were not independent;

➢ The audit commission did not have enought independent management power;

➢ Audit firms had conflicts of interests resulting from providing non-audit services such

as consulting

➢ CEO and CFO pursued an aggressive accounting and didn’t assume any

responsibility for the validity and security of financial reports;

➢ Transactions not reflected on the balance sheet were not adequately disclosed;

➢ Personal loans to directors were not justified;

➢ The analysts' reports suffered from conflicts of interest;

➢ The professional attitude of some lawyers did not comply with minimum standards.

➢ The unlimited power of top executive allowed them to give themselves excessive

bonusses and developed other ways of personal business

❖ Corporate Governance deficiencies


It is not clear that the new laws and regulations

corrected the faults of Corporate Governance.

This is indeed a work in progress.

❖ Corporate Governance – an unfinished work

http://www.olhares.com/espinha_dorsal/foto287264.html


https://www.pwc.pt/pt/servicos/auditoria/corporate-

reporting/corporate-governance.html

❖ Corporate Governance – an advisory services area

https://www2.deloitte.com/pt/pt/pages/risk/topics/ce

nter-for-corporate-governance-portugal.html

https://www.mckinsey.com/featured-

insights/leadership/board-governance

https://home.kpmg/xx/en/home/insights/2018/11/

leading-practices-corporate-governance.html

https://www.pwc.pt/pt/servicos/auditoria/corporate-reporting/corporate-governance.html

https://www2.deloitte.com/pt/pt/pages/risk/topics/center-for-corporate-governance-portugal.html

https://www.mckinsey.com/featured-insights/leadership/board-governance

https://home.kpmg/xx/en/home/insights/2018/11/leading-practices-corporate-governance.html


Exercise

1. Provide a definition of “Independent board

member”

2. Present the corporate governance

model/structure for 2 companies at your choice.


2. Legal and regulatory

Guidelines concerning


in UK


Non-Executives

Directors

Guidance on

Audit Committees

Corporate

Governance

Guidance on

Internal Control

Executive

Compensation

Corporate

Governance

Cadbury

1992

Combined

Code

2008

Combined

Code

2003

Hampel

Combined Code

1998

Turnbull

1999

Rutteman

1994

Review of

Turnbull

2005

Greenbury

1995

Smith

2010

Smith

2008

Smith

2003

Board

Effectiveness

2011

Tyson

2003

Highs

2003

UK Corporate

Governance Code

2012

Companies Act

2006

UK Corporate

Governance Code

2010

UK Corporate Governance Timeline 1992-2020

25

UK Corporate

Governance Code

– Revision

proposal

Jan. 2020

https://www.frc.org.uk/getattachment/53799a

2d-824e-4e15-9325-33eb6a30f063/Annual-

Review-of-the-UK-Corporate-Governance-

Code,-Jan-2020_Final-Corrected.pdf

https://www.frc.org.uk/getattachment/53799a2d-824e-4e15-9325-33eb6a30f063/Annual-Review-of-the-UK-Corporate-Governance-Code,-Jan-2020_Final-Corrected.pdf


Association Investment

Companies Code

2003

Walker Report

2009

Stewardship Code

2010

Other Relevant Codes and Reports

Conclusion

The UK corporate governance framework is constituted from a number of different sources, from

formal legislation that must be strictly followed and can have high penalties for failure to do so,

to the more principles based voluntary Combined Code.

The framework ensures that basic standards of corporate governance are maintained

throughout all companies incorporated in the UK whilst allowing flexibility to enable companies

to implement corporate governance policies which fit their business model.

26



Guidelines and Models

concerning Corporate

Governance in Portugal


Next slides focus the legal and regulatory guidelines concerning Corporate

Governance in Portugal.

3. Legal and regulatory Guidelines concerning Corporate Governance in Portugal


CMVMSarbanes-Oxley Act

• At least one member of the management board

must be independent (a member not associated

with specific interest groups)

• members of the remuneration committee should

be independent regarding the members of the Board

Sarbanes-Oxley Act is

mandatory for companies

with listed stocks on the

NYSE. It provides:

The OECD principles on

Corpotate Governance state:

• It must be considered the

denomination of non-executive

members and independent

members to the board.

• In the cases where there are

committees on the board, their

duties and composition must be

defined.

• The information about corporate

governance policy must be

disclosed.

OECD

• The nomination and election of

the board must be a formal and

transparent process.

• Periodic evaluation of the

effectiveness of the

structure and internal

control procedures

• Obligatoriness of an audit

committee (at least one

member must be an

expert in finance)

The «Regulamento CMVM 11/2003 – Governo

das Sociedades Cotadas» requires the board

to distinguish between:

• Executive and non-executive members

• Independent and non-independent

members

CMVM November 2003 recommendation

about Corporate Governance.


CMVM Recommendations on Corporate

Governance (2013)

The Chair of the Supervisory Board, the Audit Committee

or the Financial Matters Committee shall be independent

in accordance with the applicable legal standard, and

have the necessary skills to carry out their relevant

duties


CSC – Código Sociedades

Comerciais

ISP / ASF - Autoridade

Supervisão de Seguros e

Fundos Pensões

Decree-Law 475/99 - It

rregulates the establishment

and operation of pension funds

and fund management

companies. It defines:

• Responsible actuary(art. 32º)

• Management entity(art. 33º)

• Audit (art. 44º)

• Depositories (art. 51º)

European Commission Directives

• The need of a declaration of principles

regarding the investment policy that

should be reviewed at least every 3 years.

• The Article 18 refers to the investment

rules explaining in particular how to

proceed in case of conflict of interest

Norm 21/2002-R Investment

policy of pension funds.

Defines:

• The fund manager must define

the process of

recommendation, approval,

implementation and monitoring

of investment decisions

The directive 2003/41/CE concerning the

activities and supervision of institutions for

occupational retirement provision predicts:

• There must be legal separation between

the company and institutions for managing

occupational retirement provision (Article

8)

CHAPTER VI - Administration,

fiscalization and secretary of company

SECTION I - Board of Directors

Article 390. - Composition

Article 396. – Deposit

Article 397. - Transactions with company

Article 399. - Remuneration

Article 405. - Jurisdiction of the Board

SECTION II - Fiscalization

SECTION III – Audit Commission

SECTION IV - Executive Board of

Directors

SECTION V - General and Supervisory

Board

SECTION VII – Company Secretary

SECTION VI - Statutory auditor



Year Origin Document Recomendations Added

1986 Código das Sociedades Comerciais

* In Portugal the first legislation concerning corporate governance matters, even if not called by the name "Corporate Governance", appear in 1986 with the

introduction of "Código das Sociedades Comerciais", that contained the basic rules on corporate management and

control for all types of corporations.

1999 CMVMRecommendations on Corporate Governance of Listed Companies

* Follow the OECD Principles of Corporate Governance, without imposing strict and uniform models. It mentioned topics such as disclosure of information, exercise of voting rights, shareholder representation, institutional investors,

corporate rules and structure and functions of administration boards.

2001 CMVMRecommendations on Corporate Governance of Listed Companies

/CMVM Regulation No 7/2001

* Recomendations on the form of dutties regarding information disclosure on Corporate Governance pratices.

* Philosophy of comply or explain.

2003 CMVMRecommendations on Corporate Governance of Listed Companies /CMVM Regulation No 11/2003

* Clarification of the concept of independent director.

31



Year Origin Document Recomendations Added

2018 IPCG Corporate Governance Code

This new code results from public consultation, to the scrutiny of all those with an interest in matters of corporate governance, now under the clarified purpose of making the final, approved version the new Corporate Governance Code: a Code presented, not as an alternative to the CMVM´s Code, given that the latter will cease to be published, as already announced in the joint declaration of 16 March 2016, but rather as a successor of both then existing Codes.In relation to the 2017 edition, this 2018 version includes some brief changes in some recommendations.

The Code of Corporate Governance is effective as of January 1, 2018.

32



Anglo-Saxon Model

(One-Tier System)

Anglo-Saxon Model

(One-Tier System)

Latin Model (Ordinary System)

Latin Model

Empowered Latin Model

Germanic or Continental Model (Two-Tier System)

Germanic or Continental Model (Two-Tier System)

Germanic Model

Empowered Germanic Model

The Portuguese legislation do not seek to impose strict or uniform Corporate

Governance Models, instead it enables companies to choose between the following

models (Article 278º, of Código das Sociedades Comerciais):

3. Corporate Governance Models in Portugal

33


Anglo-Saxon Model (One-Tier System)

34

Legal framework based in Anglo-Saxon countries (UK, USA, Canada, Australia);

Market-oriented system, where an active external market for corporate control is used by

independent shareholders to influence managerial decision-making;

Individual shareholders play an important role with the principle “one share, one vote”.

Latin Model (Ordinary System)

Legal framework based in Latin countries (France, Italy, Spain, Portugal,…);



Executive

Board of

Directors

General

and

Supervisory

Board

Financial Matters

Committee

(only for empowered

models)

Single

Executive

Director

or

Statutory

Auditor

Germanic Model (Two-Tier System)

35

Legal framework based in Germanic countries (Germany, Netherlands, Switzerland, Austria,…);

Network-oriented systems, where oligarchy groups sway managerial decision-making, by stable

relationships.

Relevant Stakeholders (corporate management, employees, suppliers, debt holders, firms with

mutual cross-shareholdings) play an important role in management decisions.




Guidelines and Models

concerning Corporate

Governance in Germany

36


•Responsible for independently managing in the interest of the enterprise, thus taking into account the interests of the shareholders, its employees and other stakeholders.

•The task of the Supervisory Board is to advise regularly and supervise the ManagementBoard in the management of the enterprise.

•The Supervisory Board appoints and dismisses the members of the Management Board.

4. Corporate Governance in Germany

37


Germanic Model

Concept of the firm Institutional

Board System • Two-Tier (management board and supervisory

board)

• Management board is appointed and dismissed by

the supervisory board, and supervisory board are

appointed by the general assembly of shareholders

Salient Stakeholders Industrial Banks, employees

Importance of stock market in the

national economy

Stock markets play a small role


38

▪ A dual board management system is required by law for German stock corporations.

▪ Alternatively, German corporations may choose the legal structure of the European

Company (Societas Europaea, SE), an internationally widespread legal structure that

provides for a one tier system of governance (Administrative Board).


Germanic Model

Active external market control • Pratically non-existant

• Mutual cross-shareholdings between firms are

generally permitted and there is an implicit

agreement that such shareholdings are not used to

launch unwelcome takeovers

Ownership concentration High ownership concentration

Performance-dependent executive

compensation

Is not very common but is increasing recently

Time horizon of economic relationships Long-term and stable economic relationships


39


Voting Cap

• In principle, each share carries one vote. There are no shares with multiple voting

rights, preferential voting rights (golden shares) or maximum voting rights.

Independent Members

• The Supervisory Board is responsible to decide what is an appropriate and

reasonable number of independent members in the board.

4. German Corporate Governance Code

40

German Corporate Governance Code *

* Regierungskommission Deutscher Corporate Governance Kodex (as amended on 16th December 2019)

The Supervisory Board appoints, supervises and advises the members of the

Management Board, and is directly involved in decisions of fundamental importance to the

company.

The members of the Supervisory Board are elected by the shareholders at the

corporation’s General Meeting.


Compliance Degree:

• “Shall Recommendations” which also reflect basic international governance

standards. Companies that do not comply with these Recommendations have

to state this in their annual report and/or their website.

• “Should Suggestions“ that represent additional international elements of

good governance. These ‘Suggestions’ do not require an obligatory statement

in case of non-compliance (but the Code encourages a detailed description of

the application and any deviation from the 'Suggestions').


41


Employee Ownership

Empoyees have a participaton on the companie’s stock

Employee Representation

Employees have representatives in the board corresponding to:

• 1/3 of the board, if company has more than 500 employees

• 1/2 of the board if company has more than 2000 employees


42


5. Examples of Corporate

Governance models

43


❖ Allianz

In Germany the management and supervision is made by two different boards

(two-tiered board):

Board of Management - is only responsable by managing the company: runs

day-to-day operations.

Supervisory Board - monitors and advises.

• The members of Board of Management are responsables by managing

the company. Their functions are coordinated by the Chairman.

• The Supervisory Board is responsible by hire and fire the members of

the management board, determine their compensation, and review

major business decisions.

(the “two-tiered board” model)


http://www.allianzgroup.com/


Supervisory Board

Standing Comittee Personnel Committee Mediation CommitteeAudit Committee

Standing Committee

• 5 members (2 employee representatives)

• It is responsable by approval of

transactions that requires the approval of

Supervisory Board, if the Supervisory Board

chamber or other commission was not

obligated to give that approval.

Audit Committee

• 5 members (3 stockeholders representatives

and 2 employee representatives)

• 5 sessions per year in average

• It prepares Supervisory Board decisions

regarding the approval of annual accounts;

• It analyzes the quaterly reports;

• It prepares the decision to appoint the auditor;

• It analyzes the auditor independence;

• It establishes the anual compensation for the

anual audit;

• …

❖ Allianz





Supervisory Board

Standing Committee Personnel Committee Mediation CommitteeAudit Committee

Personnel Committee

• 3 members (Chairman of Supervisory Board,

a stockholder representative and a employee

representative in the supervisory board);

• It is responsible in particular for the

preparation of the nomination /

appointment of members of the Board of

Management;

• Responsible for issues related to

compensation remuneration

Mediation Committee

• According to German law, Mediation

Committee has by function the

resolution of conflict relating to the

appointment of members of the Board

of Management.

• Mediation Committee met only if the

Supervisory Board do not get a two

thirds vote …

❖ Allianz





❖ Axa

Axa's corporate governance model compreehends:

Supervisory Board - monitors the operations of the company and reports to

stockholders.

It appoints the Chairman and members of the Management Board and supervises

executive management.

• Supervisory Board

• Management Board

Supervisory Board formally established “Special Committees” to help implementing

the principles of Corporate Governance.

The Chairman and members are appointed by it as well as the specifications of their

rights and duties.



http://www.axa-insurance.com.hk/../default.asp


Chairman

Vice-Chairman

Members

Independent Members

Supervisory Board

❖ Axa

9 in13 members are

independent





Special CommitteesSupervisory

Board

Audit Committee Finance CommitteeSelection & Governance

Committee

Compensation

Committee

❖ Axa

Audit Committee

• 5 members (at least 1 of them has to be

independent);

• 7 sessions in average per year;

• It examines the financial statements before

they are presented to the Supervisory

Board.

• It controls the nomination of external

auditors of the company, approves the

external audit programs, results and

recommendations as well as any actions

taken in light of these recommendations.

Finance Committee

• 5 members (at least 1 of them has to be independent);


• It examines and emits the recommendations about

plans to sell properties or equity which amount of

evaluation had exceeded the authorization given at

Management Board by Supervisory Board;

• It reviews the major AXA's guidelines concerning the

asset management politics and generally all related

aspects with investment management policy.




Special Committees

Supervisory

Board

Audit Committee Finance CommitteeSelection & Governance

Committee

Compensation

Committee

❖ Axa

Selection & Governance Committee

• 5 members (at least 3 have to be independent);


• It formulates recommendations to the Supervisory

Board concerning the nomination of members to

the Supervisory Board, special committees of

Supervisory Board and the Management Board;

• The Committee is notified of the main meetings

of top executives and directors of AXA.

Compensation Committee

• 5 members (at least 3 have to be

independent);


• It recommends to the Supervisory Board

compensation levels of the salary of the

Management Board members, the amounts of

fees payable to members of the Supervisory

Board - subject to stockholder approval;

• Proposals for use of stock options to members

of the Management Board.




❖ Axa

Chairman

Members

Management Board

Management Board is the decision-making body of AXA.

These members dedicate their time exclusively to managing the company.

Each member of Management Board has a specific responsibility about some

concrete aspect in managing the company.





❖ Zurich

According the company’s social pact, the Board of Directors should have

between 7 and 13 members.

The members at Board of Directors are non-executives.

The Board of Directors should meet at least 6 times per year.

The Board of Directors appointed the following committees that will report to it

regularly and submit motions for resolutions.

• Remuneration committee

• Audit committee

• Nominations committee

(the “unitary system” model – modelo monista)


http://www.zurich.com/main/


❖ Zurich

Audit CommitteeRemuneration

Committee

Nominations

Committee

Chairman

Vice - Chairman

Board





❖ Zurich

Audit

Committee

Audit committee

• It is composed by 5 members;

• Must meet at least 4 times per year;

• It is the central organ to aspects of financial accounting, internal control, compliance and risk

management between management, internal and external auditors;

• The Audit committee is responsible for reviewing the audit process of the company;

• Reviews the internal control systems.

Remuneration

Committee

Nominations

Committee





❖ Zurich

Remuneration

Committee

Remuneration committee

• It is composed by 6 members of the Board of directors.

• It should meet at least two times a year;

• It proposes to the Board of Directors the principles of remuneration for the Group and the

remuneration of directors;

• It determines the metrics and performance analysis.

Audit

Committee

Nominations

Committee





❖ Zurich

Nominations

Committee

Nominations committee

• It is composed by 5 members of the Board of directors;

• It should meet at least two times a year;

• It proposes the principles for the appointment and qualification of members to the Board of Directors;

• It shows proposals to Board of Directors about their composition, the nomination of Chairman and

Vice-Chairman as well as CEO (the final decision however is taken by the Board of Directors).

Audit

CommitteeRemuneration

Committee





6. Example of a Corporate

Governance model for a

portuguese company


Board

Executive

CommitteeInvestment

committee

Audit committee

(the “unitary system” model (modelo monista) – n.º1, al. a), art. 278º CSC)

General Assembly

Corp. gov. and

complianceCommittee

Committee X Committee Y

Committee Z Committee W

6. Example of a Corporate Governance model for a portuguese company

Company XPTO SA Remunerations

committee

Latin Model


Executive

committee

Investment

committee

Independent

non-executive

Members

Executive

Members1*3

Non-executive

Members

Chairman of

the Board

1

total

number of

members

3*

3

1

1 3 2 7

Corp. gov. and

compliance

Committee

1

1

2

1

Board

External

Members2 2

Composition of the Board:

(um dos membros é comum)



Board

• 3 non-executive

members (one of which is

the Board president)

• 3 executive members

• 1 independent member

Composition Assemblies *

• 1 monthly meeting

and whenever this

is justified

Functions

Year of

nomination

• 3 years(art. 390º and following CSC)

• Responsible for the overall management of the company



Executive

Committee

• Responsible for leading the company's activities.

• 3 executive members*

Composition Assemblies

Functions

Years of

nomination

• 3 years

(nº3, art 407 CSC)

• 1 weekly meeting

and whenever this

is justified.

* Note: According nº 3, article 407 of CSC, the executive commission must necessarily be composed of an

odd number of directors.



Corp. gov. and

compliance

Committee


• 1 quaterly

meeting and

whenever it is

justified. Functions

Years of

nomination

• 3 years

• Monitor and track conformity with the rules and regulations applicable to company's business

• Supervise the conformity with laws, regulations and statutes concernig corporate governance and

discuss and approve measures to introduce or changes the observed principles and adopted procedures

adopted by the company concerning its governance.

• Monitoring the effectiveness of corporate governance practices and make changes when necessary.

• 1 non-executive member

• 1 independent non-executive

member



• Separation functions

• Information mechanisms

• Control and risk management

• Monitor the continuing compliance with:

• Articulate with external auditors

Corp. gov. and

compliance

Committee


• 1 quaterly

meeting and

whenever it is

justified. Functions

Years of

nomination

• 3 years• 1 non-executive member

• 1 independent non-executive

member



Investment

Committee

• Responsible for the preparation of the written declaration of principles relating to investment policy (to prepare

at least 3 in 3 years) - art. 12 of Directive 2003/41/EC

• Monitor the implementation of investment policies towards objectives and targets set

• Periodically sends to the associated members key information about the consultants and fund’s sub-managers

• 1 executive member

• 1 non-executive member

• 2 external members


Functions

Years of

nomination

• 3 years*

* Note: The external members may be appointed for a 2- or 3-years period.


• 1 monthly meeting

and whenever this

is justified



• 2 annual

meeting and

whenever

necessaryFunctions

• 3 shareholder members

appointed by the general

assembly and independent of

the Board

Years of

nomination

• 3 years

• Harmonize the remuneration of members of the board with the long-term interests of the company and its

shareholders.

• Determine the total remuneration of each individual member of the Board of Directors, including, where

appropriate, bonuses, incentive systems and options.

• Determine the targets to achieve the purpose of any remuneratory compensation based on performance.

• Be the only responsible for the establishment of selection criteria, effective selection and definition of

terms of reference for any remuneration consultants who provide advice to the commission.

Remunerations

committee

(art. 399º CSC; recomendation

CMVM Nov. 2003)



7. Comparative study: corporate governance codes in 10 European countries

Source: Autorité des marchés financiers, 30 March 2016


8. Potential areas for academic research

▪ Financial performance and mechanisms of Corporate Control

▪ Artificial intelligence and Machine Learning applied to


▪ Risk management and regulatory practice

▪ Financial market supervision and control

▪ Governance and financial market economics

▪ Codes of 'best practice' and norms of behaviour

▪ Boards of directors

▪ Internal controls and accountability


9. References


Agrawal, Anup; Jaffe, Jeffrey F.; Karpoff, Jonathan M. (1999) “Management Turnover And Governance

Changes Following The Revelation of Fraud.“

Bhagat, S.; Black, B. “Board independence and long term firm performance. New York, Clumbia Law

School, 2000. Working paper n. 143.

Sanjai Bhagat and Richard H. Jefferis, J. (2002). The Econometrics of Corporate Governance Studies.

(M. MIT Press, Cambridge, Ed.) (p. 147).

Bhagat, S., & Bolton, B. (2008). Corporate governance and firm performance. Journal of Corporate

Finance, 14(3), 257–273.

Copeland, Weston, Shastri (2005): “Financial Theory and Corporate Policy.” Fourth edition. Cap. 18.

p.802-807.

Clarke, T. (2004). Theories of Corporate Governance The philosophical foundations of corporate

governance. (T. Clarke, Ed.) (p. 355). London and New York: Routledge Taylor & Francis Group.

Damodaran, A. (2007). Return on Capital ( ROC ), Return on Invested Capital ( ROIC ) and Return on

Equity ( ROE ): Measurement and Implications Aswath Damodaran Stern School of Business, (July), 1–

69.

9. References


Fama, Eugene F., and Michael C. Jensen (1983). "Separation of Ownership and Control." Journal of

Law and Economics 26. p. 301-325.

Financiers, A. des marchés, 2016. Comparative study: corporate governance codes in 10 European

countries, Paris.

Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs

and Ownership Structure. SSRN Electronic Journal, 3(4), 305–360.

Higgs, Derek (2003). “Review of the role and effectiveness of non-executive

directors”;

Instituto de Seguros de Portugal (2005). Revista semestral do ISP nº 21.

OECD (2004). Corporate Governance – A survey of OECD countries. OECD publications.

OECD (2004). Principles of Corporate Governance. OECD publications.

Schilit, Howard M. (2018). “Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in

Financial Reports”. McGraw-Hill, New York.

9. References

Weimer, J. & Pape, J., 1999. A Taxonomy of Systems of Corporate Governance. Corporate

Governance, 7(2), pp.152–166. Available at: http://onlinelibrary.wiley.com/doi/


Some relevant sites concerning Corporate Governance

PORTUGAL

https://www.cgov.pt/

UK

https://www.frc.org.uk/directors/corporate-governance-and-stewardship/uk-corporate-governance-code

GERMANY

https://www.dcgk.de/en/home.html

FRANCE

http://www.amf-france.org/en_US/Reglementation/Dossiers-thematiques/Societes-cotees-et-operations-

financieres/Gouvernement-d-entreprise/Etude-comparee--Les-codes-de-gouvernement-d-entreprise-

dans-10-pays-europeens

9. References

http://www.euram-online.org/corporate-governance.html

EUROPE

https://www.cgov.pt/

https://www.frc.org.uk/directors/corporate-governance-and-stewardship/uk-corporate-governance-code

https://www.dcgk.de/en/home.html

http://www.amf-france.org/en_US/Reglementation/Dossiers-thematiques/Societes-cotees-et-operations-financieres/Gouvernement-d-entreprise/Etude-comparee--Les-codes-de-gouvernement-d-entreprise-dans-10-pays-europeens

http://www.euram-online.org/corporate-governance.html


Assignment

1) Identify databases concerning Corporate Governance (hint, Mendeley can be a

source for searching) that can be used for academic research

2) Identify academic papers relating Artificial Intelligence and Machine Learning with


3) Identify 2 academic papers from 2019 or 2020 concerning Corporate Governance

10. Assignment


Exercise

New model of corporate

governance in a post-

acquisition operation


Company Alfa S.A. dedicates to manufacturing (laser cutting) and commercialization of

metal components for different industries, in particular the automotive industry.

This company was formed about 10 years ago and has always been owned in two equal

parts of 50% for each of its two managing partners.

Your company, the acquiring company, just acquired 60% of the share capital of company

Alfa S.A.. Your company is one is of the leading companies in the metal sector in Portugal

with a very strong financial capacity.

The acquiring company is family owned in which the management is done by the parents

and two sons (all with a university degree in management at ISEG-Lisbon University).

Exercise

It is requested that:

Submit a suggestion concerning the Corporate Governance model that may be adopted

in the post-acquisition of Alfa S.A.


Telmo Francisco Vieira

[email protected]

[email protected]

+ 351 917 820 650 (WhatsApp)

mailto:[email protected]

mailto:[email protected]

telmo francisco vieira - iseg

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